The IRS and healthcare: A heavy lift

Now that the Supreme Court has issued its ruling on the Affordable Care Act, many are taking a closer look at how the law will be implemented, including at the new enforcement duties given to the IRS. The Government Accountability Office has said the IRS faces “a massive undertaking.” The National Taxpayer Advocate believes that “with proper planning and funding, the IRS is fully capable of implementing healthcare reform.” I am not so sure. And even if the IRS comes through on healthcare, will tax administration be damaged in the process? I know the service will do its level best to implement healthcare reform, but the IRS confronts a long list of challenges. Several concerns are particularly important.

The IRS has a large number of major information systems which require regular updating because of constant changes to the tax code. Healthcare reform cannot help but compete with the service’s heavy systems workload. The Affordable Care Act confronts the IRS with the need to collect new kinds of information and to interact with additional parties. The exchanges will be new entities, complicating the task. If one thing kept me up at night when I was commissioner, it was the worry that the IRS would belch forth the personally identifiable information of millions of Americans. The IRS enters into strict protocols with states and other taxing authorities, and has an excellent record protecting taxpayer information. Nevertheless, under the new law, the IRS will be sharing taxpayer information with many additional parties, some of which (like the exchanges) will be going through growing pains of their own. A significant data breach would shake America’s faith in the IRS and hurt revenue collection.

The United States enjoys a high level of tax compliance. The system depends on the integrity of taxpayers and the efforts of the IRS, as well as practitioners who help individuals and businesses understand their tax obligations. Especially for the small and medium-sized businesses which employ two thirds of all private sector workers, CPAs serve as general business advisers helping clients navigate various government regulations. Most businesses don’t have sophisticated tax and human resources staffs poised to explain the intricacies of healthcare reform. The volume of changes associated with the Affordable Care Act, as well as the nature and complexity of certain of its provisions, will be tough for practitioners to absorb. CPAs and small and medium-sized businesses are flummoxed by the Affordable Care Act, a problem magnified by the inability of Congress to resolve tax matters critical to business and provide even a modest amount of certainty for investment planning.

Next year’s tax filing season will be the toughest in decades for the IRS because of delayed congressional action on numerous tax provisions and the exploding problem of identity theft. On top of all this, there is the welcome possibility of tax reform. Even a large organization like the IRS has a limited number of executives capable of directing major activities. To the extent that healthcare absorbs their time, tax administration will suffer.

For well understood reasons, the IRS operates with a great deal of independence from other government agencies and the White House. I can only recall one meeting in four years where I participated in a discussion with White House staff and officials of other agencies covering a policy matter. I worry that IRS is standing on a slippery slope being so intertwined with a major domestic policy initiative.

Some opponents of the reform act are demonizing the IRS to build a case for repeal. Most striking is the disturbing comparison of the IRS to the Gestapo by the governor of Maine. Unconscionable attacks upon the IRS of this kind will take a toll on the Service and its people, and ultimately hamper revenue collection. The IRS drew down its enforcement activities in the late 90s after a savaging in the political arena. The country was running budget surpluses then and could afford it. Now we need the money.

If the IRS does execute the long list of tasks assigned to it under the Affordable Care Act, there is still an unquantifiable but real risk that healthcare reform will falter or perhaps even fail because of the sheer number of moving parts and complexity of the new system. Let’s hope reform is not a modern day version of the Vasa, the top heavy Swedish warship which sank minutes into its maiden voyage, less than 400 feet from shore. The damage to tax administration would be serious and lasting.

Everson is the vice chairman of alliantgroup, a provider of specialty tax services for small and medium-sized businesses. Everson was commissioner of Internal Revenue from 2003 through 2007. His comments here are drawn from his recent testimony to the Committee on Oversight and Government Reform of the U.S. House of Representatives.

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